Friday, June 05, 2015

What You Should Consider Before You Discount Your SaaS Product

At first glance, discounting your SaaS product can seem like a great way to undercut your competition and take a greater share of your target market. But there are other implications you have to consider before you lower your price relative to similar products in your market, especially those with the same general feature set as you.

While lowering your price can be good for initially boosting signups and getting more customers in the door, it should not be done in the absence of an overall and ongoing strategy to be a least-cost service. Many companies are successful with this least-cost model with the lower revenue generated per user offset by more users overall.

But this pricing scheme has to align with a company’s longer-term strategy for their product, brand and price. Companies looking simply to increase the number of initial users with a cheaper price with the intention of moving to a high pricing tier later on will face added challenges. These include lower value perception of your product, increased churn and, likely, lower revenue. So, when deciding where your price is going to fit initially in your market, consider the long-lasting impact on your product, company and brand.

Lower Prices Attract More Price Sensitive Customers

If you lower your price, you first affect the type of users you attract. While you’ll likely get more customers than if you keep your price higher, many of them are likely to be more price sensitive. This is an advantage over higher priced competitors until you want to raise your own price.

Compare this to the customers you may have attracted with a higher price. They are looking for more value and are usually willing to pay for it. They are more likely to have researched their options and are more committed to sticking to a high-value, higher priced product. Alternatively, price-sensitive customers will likely place a lower value on your product and be more likely to churn as soon as they feel like they are not getting sufficient value, especially if there is a price increase.

Changing Value in the Eyes of Customers

A product is worth as much as a person is willing to pay for it. But how do people judge how much they’re willing to pay for a specific product? When it comes to SaaS, the value perceived by customers usually isn’t linked with the actual costs to deliver a service. Rather, customers may shop around to see what other competitors are offering to get a sense of a fair price for the features being offered.

But interestingly, users are often most heavily influenced by the first price they see with every subsequent price being judged against it. If your price is low compared to most, customers will likely perceive your product’s value as less and it can be difficult to overcome that initial impression.

This causes a problem if you want to increase your price, perhaps to more closely match other competitors. Customers will be accustomed to valuing your service at a certain lower level and many, especially more price sensitive customers, will unsubscribe, increasing your churn rate. So, be careful if you start at a low price to attract more customers and then decide to substantially raise prices to a more competitive level for your product. You may encounter more resistance and more churn because your users don’t perceive the value of your product as matching the value you are now asking them to pay even if you are comparable to a higher-priced (but higher perceived value) competitor.

Lost Revenue

Lower prices, lower value perception and higher churn all add up to lower recurring revenue. While underpricing can produce short-term gains in terms of the number of users acquired, there are better ways to attract new and higher quality customers if you want a more premium brand, product and pricing scheme.

Subscription companies can opt to be a least cost option with mass distribution or they can price higher and position themselves as a higher value option. Either pricing approach can be successful with corresponding strategies. But temporarily discounting a price to get a number of customers initially will likely mean you’ll face additional challenges if you increase prices down the road.